Thursday, January 23, 2014

Can Flood Insurance Costs Be Controlled?

In 2012 Congress passed the Biggert-Waters law to enable the National Flood Insurance Program (NFIP) to recover from the verge of bankruptcy. This made sense as the wave of claims after Hurricane Katrina placed an impossible financial burden on the Program. Superstorm Sandy exacerbated the situation. But the financial recovery will be achieved by removing the subsidies that kept insurance costs low. While the need for making the NFIP self-sustaining is obvious, the effect on the subsidy removal on homeowners is huge. Take for example a New Jersey resident whose home suffered major damage when Sandy hit. His insurance premium, he was told, will rise from its current level of $1,000 to $8,000 or $9,000 in the course of the next 5 years. This is because his home is now considered to be in a high risk area. He can expect his flood insurance premiums to increase by about $1,600 every year until the final amount, which FEMA will estimate as the true coverage value, is reached. This kind of increase is expected to not just hit homeowners hard, but even to cause many of them to lose their homes.

The Homeowner’s Flood Insurance Affordability Act

This bipartisan bill was introduced to Congress on the anniversary of Superstorm Sandy and then reintroduced last month. It aims to place a freeze on the majority of flood insurance premium rates until such time as FEMA is able to complete a detailed affordability study and the accuracy of the results are scientifically verified. It also seeks for ways to be found to mitigate the huge burden that the expected major increases in insurance rates will place on homeowners.

Many in New Jersey are still struggling to get back on their feet after Sandy. The increase in flood insurance rates will make the recovery slower, if not impossible. If people are forced out of their homes, property values will drop and this in turn will have a major impact on the overall economic recovery after the natural disaster. In other words, not increasing insurance rates will destroy the NFIP. But increasing them may result in ruining the already damaged economies of the affect regions. But it need not be a lose-lose situation. The Homeowner’s Flood Insurance Affordability Act offers a road map of how both homeowners and the NFIP can remain protected, at least in the short term until the FEMS study is completed, verified and ways to counter the impact of increased rates are found.

The Way Ahead

The proposed legislation will exempt second homes, businesses and properties that are badly damaged or which are subject to repeated flood damage so as to reduce the claims burden of the NFIP and provide some relief to the program. Rates increases can be reduced or delayed. By this process, the number of homeowners who would otherwise drop out of the program should be substantially reduced. Any large departure of policy holders from the program will have a major negative impact on its already overburdened finances.

The need for effective and affordable flood insurance is not limited to only the coastal areas and the northeast. Every state has properties that are covered by the NFIP and so every state will suffer from the effects of rate increases. In turn, the economy of every state, to varying degrees, will be affected. The proposed legislation is supported by the National Association of Realtors, the National Association of Homebuilders, the American Bankers’ Association, the Independent Community Bankers’ Association and the National League of Cities among others.

Major increases in flood insurance premiums will cause many to lose their homes, other to leave the program and damage economies across the country. The passage of this bill offer both short term relief as well as the hope of a viable long term solution.

If you’re buying/selling a property and are wondering how NFIP is going to affect the property’s value, or have any questions related to your insurance, contact Allied Brokers at our website or call us at (650) 328-1000.

Obamacare – A Private-Public Hybrid That the Public Pays For

A lot has been said and written about Obamacare and there are strong feelings on both sides of the argument. With no resolution in sight, expect both sides to continue to fight. But a look at some of the figures involved and the way the system works will show that there is one big loser in the whole process – the American taxpayer. How will this happen? Here’s how –

The Funnel

As most people know, Obamacare will cost the country $1.07 trillion in the next ten years. This money will be funneled through Washington D.C. to the insurance companies who will use it cover their losses. This is bad enough, but the worst part is that the Administration is trying to coerce people into buying these same health insurance products that they are anyway paying for through their taxes. So the American citizen first subsidizes the loss that the insurance companies will make and then will go an buy these products. In other words, people will pay twice for the same product.

How does this happen? Obamacare contains a reinsurance program that caps the costs of big claim on insurers for individual plans. Health insurance claims of up to $45,000 are paid for by the insurance companies. Anything beyond that is borne by the taxpayer in the form of subsidy to the insurers. This cap will bring more insurance companies into the program because of the safety it offers them. In other words, the government is working hard to create a single player system and establish a government monopoly over health care. It looks like the alliance of big business and big government has finally reached a takeoff point.

It Doesn’t Stop There

While the reinsurance program is going cost taxpayers a huge amount, there is another safety net for the insurance industry that the government (i.e. the taxpayer once again) will be paying for. This is called the Risk Corridor Program that will limit any possible overall loss that an insurance company may suffer. How will this happen? It’s like this – an insurance company estimates that its costs for the year. Say the figure I 100. But the actual costs, for whatever reason, are 110. The insurance company will not have to bear the extra cost of 10 on its own, like other businesses have to. Instead, it will have to accept just 102.4 of the total cost ( an extra 2.4) and the government through the taxpayer will bear the rest.

Rates Will Stay The Same

Given that the insurance companies will receive so much in the way of subsidy and protection from losses, it would be fair to expect that at least insurance costs will drop. While it is too soon to say with any certainty what may occur in the course of the year, experts feel that this will not happen. To be fair to the insurance companies, there is a reason for this. Obamacare is expected to attract more older and sick people into the health insurance pool and this will cost the insurance companies more in terms of claim payouts. In fact, it is even possible that over the next two years, rates may stay stable without the normal increases that could be expected. This will offer a good PR opportunity to the administrations spin doctors who will be able to trumpet the benefits of Obamacare. But the fact that this will be achieved at massive taxpayer costs cannot be ignored.

Obamacare may have its positives. But the person who will bear the cost of all this is the American taxpayer.

Got questions about your insurance? Call us at (650) 328-1000.

Monday, January 6, 2014

A New Year – New Insurance Rates

When you are recovering from the excesses of the holiday season, both physically and financially, the last thing you want to face up to is an increase in your insurance rates. But that is exactly what Mercury Insurance policy holders in California will have to do. The company, which was forced to lower premiums in June of 2013, has announced a rate increase that will come into effect from January 2014.

Home, rent and condo insurance rates on both new and renewal policies will increase by an average of 8.6% statewide. If the lowering of rates in June is taken into account, the net increase will be an average of 3%. In the case of auto insurance, the increase will average out to around 6%. There will however, be major changes in specific areas, with some premiums actually going done. For example, while Liability coverage will increase by about 16.8%, Collision coverage will go down by about 5.4%.

Reducing the Impact

Fretting about having to pay more for insurance is counterproductive. What people should be doing is looking at ways to minimize the financial impact. For example, Mercury offers a discount of 15% if both home and auto insurance policies are with them. Many policy holders have their coverage divided amongst different insurance companies. Bringing them together under one company can result in significant savings that would not only offset any increase in rates, but even result in a net saving.

Those who are going to be affected by the increase in Mercury Insurance rates should contact their insurance agents or brokers to examine the full implications of the rate increase and the avenues for reducing the impact.

Take a Long Term View On Insurance

A common mistake that many people make is to consider and evaluate their insurance policies on an annual basis. That does help with financial planning and budgeting. But insurance is not something that is required for a limited period. Policy holders will not sell off their homes and move into hotels for the rest of their lives. They will not sell their cars and start travelling by bus or taxi. They will not stop falling sick or suffering from medical conditions. They will need insurance coverage against these and the other risks for the rest of their lives.

In a world of increasing costs, insurance rates will continue to rise over time. This can be compensated for by reducing the quantum of coverage, but with a very few exceptions, this is a dangerous risk to take. The better alternative is to think of insurance as a lifelong association. Association is a far better word for the need for insurance than “investment” or “expenditure.” This approach will enable the policy holders to look at their insurance needs and costs with a long term perspective and plan for not just one year but for a much longer period. This can be difficult for the layman who may not have expertise in insurance issues or be a qualified financial planner.

Talk To Experts

Insurance by Allied Brokers know the insurance business inside out and have the expertise to guide clients to the most cost effective insurance coverage. In addition, we will be able to help policy holders to plan their long term insurance to minimize the impact of future insurance rate increases. Call us at (650) 328-1000 to know more about the rate increases and with any questions you have about your insurance policies.

Saturday, January 4, 2014

Technology Could Hit Your Insurance Costs

We have all grown up believing that technology is the tool that has improved the quality of life and that it will continue to do so. While there can be no argument about the way our lives have changed, usually for the better, because of the new technologies we see appearing almost every day, there is a small downside to this.

There are still some activities and tasks that need us to be physically present at a specific location. And that means dragging oneself away from the computer. Or does it? Tablets and smart phone give us access to the internet and basic computing abilities and they travel with us wherever we go. But to use them means stopping what we are doing and focusing attention on the device. Soon even that will be a thing of the past. Google Glasses will soon be available to everyone. What’s so great about this? It’s simply that with these glasses project a thumbnail sized image onto one of the lenses of the spectacles. This will provide the wearer with computer and internet access literally on the go.

The Good

There are obvious advantages to Google Glasses. They can be worn like a normal pair of spectacles. No extra equipment like a tablet needs to be carried around. Since no hands are required to hold them, other activities can continue more or less uninterrupted. And access to the internet 24/7 (or as long as the glasses are worn) opens up a whole new world of information and work and pleasure opportunities.

The Bad

Will Google Glasses take users into another cyber dimension? Will they become androids, semi-permanently linked to the internet? Will real world and real time activities suffer? Will direct person to person interaction slowly become a thing of the past? And how safe are the glasses in terms of distraction resulting in accident or injury? There are questions that will only be answered when they come into widespread use, but the danger of having almost continuous web access is apparent to everyone. All technological progress has had its downside and mankind has adapted to maximize the benefit and minimize the negatives. It should happen this time too.

The Ugly

The Good and the Bad are issues we will need to deal with in the next few years. But there is an Ugly that is making its face known today. And that is the effect that technology can have on insurance rates. In many cases gadgets like anti-theft devices can result in reduced insurance premiums. But the opposite can also be true.

Take for example the case of a woman in California who was recently given a ticket for wearing Google Glasses while driving. The lady was pulled over for speeding and the police officer noticed that she was wearing Google Glasses and tacked on a citation normally given to drivers who are distracted by watching a video screen while driving. While the lady has pleaded not guilty to both the charges, if she is found guilty, the effect on her insurance rates could be huge. Such tickets do affect your insurance rates.

An increase of a few hundred dollars a years on her auto insurance premiums could negate any benefits that the Google Glasses offer her. We at Allied Brokers just fought and won a ticket that would have raised the rates by $500 a year.